New T-Bills Futures Contracts Blocked

By Jerry KnightJuly 15, 1980

Fear that commodity speculators might manipulate the price of U.S. government bonds and Treasury bills forced federal commodity regulators into a confrontation yesterday with the nation's two biggest futures markets.

The Commodity Futures Trading Commission went into federal court in Chicago and got temporary restraining order blocking expansion of trading in contracts for future delivery of Treasury bills and other government securities.

The court order effectively stopped trading in new T-bill and T-bond futures contracts announced recently by the Chicago Board of Trade and the Chicago Mercantile Exchange.

The two commodity markets are expanding their trading in Treasury bill futures to head off competition from the New York Stock Exchange.

The NYSE is starting its own New York Futures Exchange to try to get a part of the rapidly growing trading in futures contracts for government securities.

T-bill futures allow investors to speculate on whether interest rates will go up or down. A T-bill futures contract gives an investor the right to buy or sell $100,000 of U.S. Treasury bills at some future date. A speculator who thinks interest rates are going up can buy a T-bill futures contract at today's price and sell it at a profit several months from now when the contract is worth more money.

Much more than competition between New York and Chicago markets for financial futures business is at stake in the case filed yesterday, government lawyers said.

Rapid expansion of trading in Treasury bill futures threatens to cause serious problems for the Treasury Department and the Federal Reserve Board in managing the nation's money supply, officials at the two policy making agencies have warned.

Federal Reserve Chairman Paul A. Volcker and Deputy Treasury Secretary Robert Carswell urged the commodity regulators last week to take action against the Chicago exchanges.

A joint study of T-bill futures by the Treasury and Fed warned that commodity speculators already have tried to manipulate prices in the T-bill futures market.

Just as speculators have tried to corner the market in grain by buying all the supply available and pushing up the price, they also have tried to squeeze the T-bill market and force up interest rates, the study warned.

Carswell told the CFTC the Treasury is worried about "adverse impacts on the cost of Treasury financing and the management of the public debt" of excessive speculation in T-bills.

The Fed and Treasury suggested that one way to minimize shortages is to allow only one exchange to trade t-bill futures maturing in a particular month.

Trying to set up such a system, the CFTC authorized the Chicago Mercantile Exchange to trade contracts for delivery of Treasury bills in December, March, June and September, gave the NYFE the MONTHS OF january, April, July and October, and assigned February, May August and November to the Commodity Exchange Inc. of New York.

But a few days ago, The Mercantile Exchange announced it was expanding its trading by adding contracts in some of the same months as the NYFE. The exchange said it did not need to get the CFTC's approval for the change because the commodity regulators earlier had given it blanket authorization.